3 Reasons to Shift Procurement From Just In Time to Just In Case
Going against the recent trend of just-in-time lean supply chains, companies are building up just-in-case inventories to survive disruptions.
Unfortunately, during the pandemic, Just in Time became Just Too Late. Plants shut down, store shelves were empty, and construction jobs sat idle. The supply chain was stretched to its limit, and in many places it broke like a taut rubber band.
In many sectors, procurement teams learned the hard lesson that it’s necessary to carry extra inventory to avoid manufacturing shutdowns and out-of-stock situations.
Automakers like Toyota pioneered the Just-in-Time manufacturing model, where components arrive at the assembly line precisely when needed. With supply chain disruptions of the past few years, Just in Time inventory is shifting toward Just in Case.
Procurement teams have adapted to the idea of purposefully carrying more inventory to build supply chain resilience. In a recent McKinsey survey, 80% of respondents said they increased inventories last year.
Additional research of 300 global companies found that inventories increased by 11% over the past three years. Some companies would have added even more safety stock if suppliers could have met demand.
The Just-in-time (JIT) procurement strategy is built on the idea of a lean and fast supply chain. The system orders only enough inventory to last until the next order arrives. The goal is to reduce stock expense by using highly accurate demand forecasting and supplier relationships to ensure an uninterrupted product flow at the lowest cost.
In contrast, Just in Case (JIC) procurement requires buffer or safety stock to reduce the risk of running out in the event of unexpected spikes in demand or supply chain disruptions. You keep more inventory on hand, just in case you need it. It is designed to be agile and resilient, which is different from lean and fast, according to Michael Verhoeven, managing director at SAP for UK and Ireland.
By operating with a JIC strategy, companies may invest more in working capital but lower the risk of empty shelves. However, with inventory on hand, companies can adapt to inclement weather, rising fuel prices, congested traffic, overwhelmed ports, and other supply chain uncertainties.
Why Just in Time Worked
The Just in Time model can be an elegant ballet, as car seats arrive at just the right time to install into a vehicle moving along the line, right after the carpet but right before the instrument panel. But if those seats are a few minutes late, the assembly line has to shut down or divert unfinished cars to a holding lot.
The JIT or lean philosophy quickly spread from automotive to other industries to take advantage of low inventory carrying costs and precision supply chain operations.
The JIT system makes sense until the supply chain is interrupted by a global event—let’s just say a pandemic that locks down much of the world for several months. The value of a lean supply chain that eliminates wasted resources is evident. But it doesn’t leave much room for a “what if” scenario.
In response to Covid and other disruptions, procurement teams are building up inventories in opposition to the recent trend of lean supply chains. There is definitely a transition from a lean mindset to allowing buffer stock to absorb delivery delays. Still, no one wants to carry more inventory than is absolutely necessary. Emerging technology is helping to optimise inventory levels for a balance of just-in-time and just-in-case strategies.
Just-in-Case Strategy Shift
Shortages of everything from semiconductors to beer bottles have forced companies to rethink their inventory strategy. For example, automakers have offered extended contracts and upfront payments to ensure a supply of vital microchips.
The downside of just in case is that it ties up working capital. Plus, there are rising costs for inventory storage as warehouse vacancy rates drop. Real estate experts estimated the UK could run very short on warehouse space sometime this year. As rates rise, storage costs could surpass the profit margin from selling the inventory. One toy company decided to bury product in a landfill to save on storage costs that it couldn’t recoup through discounted sales.
Volatility is another issue. If transport was consistently going to take 10 days longer, you could adjust the timeline. But some things may arrive on time, and other products arrive 20 or 30 days late. Systems designed for smooth flows don’t accommodate variability well. Buffer stock can absorb the variability without impacting downstream operations.
3 Reasons to Consider Just in Case
Diversified sourcing supports increasing inventory to overcome shortages and delays without disrupting product flow. While there may be additional expenses, ideally, those are lower than the loss of production or lost sales due to shortages of critical components and materials.
Predictive analytics can help balance inventory buildup and efficiency. Procurement teams can take advantage of bulk buying and long-term relationships to decrease overall procurement spend.
A JIC supply chain reduces risk by avoiding single points of failure. McKinsey reported 81% of manufacturers in its survey implemented dual-source strategies in the past year. With diverse sourcing and safety stock, demand projections don’t have to be as precise because of the buffer stock. Procurement teams have some leeway to adjust their plans without disrupting the business.
JIC sourcing encourages an elastic supply chain that can bend without breaking. If demand spikes or a supplier can’t fulfil an order, the procurement team can adjust without investing in expedited shipping or manufacturing to obtain additional stock.
Succeed with JIC Through Visibility
Visibility into the supply chain has never been more critical. Companies can manage risk only when they have a clear picture of each component. But many companies still don’t have insights into suppliers beyond the first tier.
Adopting a JIC approach is not a set-and-forget strategy. Buffer stock won’t likely be a static number for any item. Technology can help constantly adjust the amount and location of safety stock for categories and individual items. Capturing demand signals will help prioritise inventory planning.
Some companies, like automakers, are using technology to identify supply chain issues. Digital trackers on shipments provide real-time alerts if trucks are running behind schedule. Monitoring these highly variable steps in the supply chain will help develop predictive action plans. With accurate, timely information about the supply chain, companies can confidently optimise the level of buffer stock.
Eventually, advances in artificial intelligence will help companies monitor risk from external factors like weather events and industry and political trends.
Fully understanding the complexity of multi-tier supply chains is still highly challenging. The goal is to develop a strategy that accommodates volatile circumstances so that inventories are low as possible to keep the flow moving while maximising use of capital.
Have you made the shift to a JIC philosophy? Tell us how it’s going in the comments.